To Save The Economy, Politicians Need To Stop Thinking About The Long-Term

It sounds good, if you're a politician, to say you're thinking about the country's long-term.

But the biggest crisis the US faces is a lack of short-term thinking. In a sense, the lack of short-term thinking is prima facie obvious: Over 3 years after the financial crisis, unemployment is still around 8%.

But there's good evidence that short-term thinking will have good long-term economic payoffs.

For those unfamiliar with the terms, structural unemployment is associated with long-term problems in the economy (like, perhaps possibly, a gap between worker sills, and the skills that employers need). Cyclical unemployment is regular unemployment associated with a lack of economic activity. Generally, those who have favored more stimulus from both Congress and the Fed have argued that our unemployment problem is cyclical, i.e. susceptible to fixing if we create more demand.

In the paper, Ghayad and Dickens break down the "Beveridge Curve", a kind of chart which breaks down over time the connection between job vacancies and the unemployment rate. It stands to reason, of course, that as job vacancies go up, unemployment goes down and vice versa.

And that is the case, but... one distinct aspect of this "recovery" is that unemployment hasn't fallen as fast as job opening have come available. You can see, for datapoints starting in the middle of 2009, as the vacancy rate began to rise, unemployment fell, but only at a muted pace.

Of course, we need a lot more new jobs. But there are already more than 3 million jobs open and unfilled in America, mostly because the people who apply for them don’t yet have the required skills to do them.

But in their paper, Ghayad and Dickens explain that the outward shift in the Beveridge Curve is NOT the result of a skills gap.

They do this by running a bunch of micro Beveridge Curves for various ages, industries, and most importantly durations of unemployment (more on this in a minute).

So for example, they discover that financial services, retail, and business services. All have that same outward shift starting in 2012. Automatically that weakens the skills argument, since this is not unique to one industry or one group of folks.

They then show the same outward shift across various ages and levels of education, again mitigating the notion that somehow this is a story unique to those without education or skills. Here's four examples of that.

The real money charts, however, are where they look at Beveridge Curves sliced down by duration of unemployment.

This is where the drop a bombshell. They discover that for almost all durations of unemployment, there's no outward shift in the Beveridge Curve.

You only see the outward shift when you look at people who are long-term unemployed. Then things really blow out.

This has profound implications.

As Paul Krugman explains, the defining aspect of stubbornly high unemployment is the difficulty that the long-term unemployed have in re-entering the workforce.

There are various possible reasons for this: Some could be to skills erosion. Some could be social (both on the employer and employee front). But the gist is that it's of crucial importance for the long-term to not let too many people become long-term unemployed, otherwise that represents a drag on the economy that goes beyond cyclical factors. Economists have a term "hysteresis" to describe the process by which the economy loses potential capacity because of a protracted downturn. There has been evidence that this is happening. And this is why the best long-term move is to think more short-term.